Daily Investment Interpretations

Thursday, March 24, 2009

2009-3-24 (11:00 p. m.):  Todd Harrison has just published this article, Should you stay in market, or go?, in which he urges caution with t he S&P 500 above 800. 
3-24:  The markets pulled back a bit, falling between 1.5% and 2%. The NASDAQ doffed 39.25 points (-2.52%) to 1,517. The Dow slipped 115.65 points (-1.49%) to 7,660, and the S&P 500 shrank 16.67 (-2.04%) to end the day at 806. Oil was essentially unchanged at 53.71, while Gold fell $28.70 to $923.80. The VIX dipped 0.3 to 42.93 
    Today's most significant news for investors may be Michael Ashbaugh's conclusion that this bull still has room to run: Ashbaugh's charts forecast gains. Mr. Ashbaugh suggests using the 50-day moving average, currently at 793 for the S&P 500.
From Minyanville tonight, we have, Op-Ed: Is a Countertrend Rally Inevitable?
    Here is Todd Harrison's take on the current situation: "
We wrote a note today following through with our earlier statement that we would become more defensive at SPX 800 or above."

    Paul Krugman has written his Monday op-ed article: Financial Policy Despair
    A related article, Room for Debate, presents the reactions of four economists to the Geithner toxic ("legacy") assets plan. 
.   Permanent Link to Larry, Larry responds to White House Advisor Larry Summers' "puzzlement" concerning Dr. Krugman's dismay over the Administration's "legacy" assets plan.
    Permanent Link to Great minds … identifies the agreement between his and someone else's quantitative estimates of the way the Treasury's "legacy" assets plan would work. That article, in turn, links to The “Geithner Put”, part 1. And among the reader comments appended to Part 2 of this article is the following gem:

"Notice who is being left out of all of this – and bulldozed over in the process.

"The poor stiffs who took out those mortgages in the first place. Sure, some will play jingle mail, and others will be greedy operators who got caught attempting one flip too many. But most will be decent folks who really will bend every effort to scrape through and save the house, even if it has negative equity for a while.

"What happens to them once the Geithner Put is rolled out?

"Well, there was a time when there might have been some hope for them to go into bankruptcy and get their loans renegotiated. (Oh yeah, I forgot, banks around the country are doing this every day — voluntarily. Why there was actually a reported sighting of a mortgage renegotiation last Thursday in Roswell. Or was that a flying saucer?) In other words, there used to be some hope, however faint, that we might get the lenders, at whatever generational level, also to take a haircut, and this time in relation to the consumers and not just in relation to other lenders.

"But once we go to Geithner’s Put, that ain’t gonna happen.

“'Harumph, Harumph, Mr. Small Guy, on this Medusa, yeah, some of us bankers and hedge fund managers will end up cannibalizing one another. But that’s OK, you won’t have to watch it. Because we will have long since thrown you overboard. Indeed, we may be able to churn this musical chairs asset swapping long enough so that some of us actually come out big winners. But that will be after Sheriff Tim has put your and the Missus’ furniture out on the lawn, and we get somebody into your old house who can finally make the payments, albeit at a lower level that you, you sap, contracted for. Remember, those contracts are sacred – except when you’re too big, or too dear to the hearts of Tim and Ben, to fail.'”

"And trust me, though Timmy won’t be the physical Sheriff, he will be cutting so many side deals to insulate these lenders from any risk in relation to a shared burden with the mortgage holders, that he will be the hammer that makes sure that the home-no-longer-owner is left even more out in the cold than he is now.

"And pick a number between 1 and 10 for how transparent those back room deals will be, with 10 being most transparent? Would you believe minus 4, à la twisting Chris Dodd’s arm – but apparently not that hard – to expunge any so-called “populist” elements from the Stimulus Bill? Or à la AIG finally being forced to cough up the information that for all these months it has been laundering our tax dollars to Goldman Sachs and many of its “deserving” friends both here and abroad the great “haircut” rate of dollar for dollar?

"Yup, the Treasury Department will be the new owners’ muscle, making sure that the full force of the Government ensures that the bankers optimize, even at a discount. And to hell with the people trying to hold on to those homes. Don’t they realize that this is all about swapping assets in the pit, not about having a roof over your head?

"Remember when Hank Paulson was badgered by Congress to use some of the TARP funds to help out the mortgage holders? Remember when Hank’s answer to that plea was to flip the bird to Congress? Timmy was at his side then, and Timmy’s new program is simply a wonky way of obfuscating the social reality that that this whole thing is ultimately about real people, real people who are about to get really squashed so that the financiers can go back to playing their games – in the baleful sense in which Jon Stewart recently excoriated them.

"And watch how quickly the secondary market develops for these assets. Why, how long before we have credit default swaps – or their functional equivalents – for these asset purchases effectively guaranteed on the down side by the taxpayer?

"And then, of course, we’ll need a bailout to bailout the bailout of the bailout, and so on ad indefinitum.

"This wouldn’t have happened if the banks had been nationalized, because that would have put the whole matter into a political context, where there would have had to have been give and take from both sides and, well, just a smidgen of acknowledgement that we have government and other institutions ultimately for the sake of the general social welfare, not for the sake of securing Vikram Pandit’s right to do a $10m makeover of Citibank’s executive offices.

"But not in Tim’s universe, where only bankers and hedge fund managers, and other varieties of really “creative” people exist.

"And is there anything more risible than the suggestion that the banks will end up footing this bill through premiums paid to the FDIC, even though, alas, so many good people will have to be thrown under the bus along the way to maintain the sanctity of these “public/private” contracts that Tim is about to enable? Really, how can anyone make that suggestion with a straight face?"

    This brings thoughts about the "societal unrest" that Todd Harrison has predicted.

     From Minyanville, we have Five Things: Rampant Ponzi-monium, by Kevin Depew.  His other recent article is Five Things: Fed Fires Final Bullet; Market Shrugs. Basically, it talks about the Fed's failure (so far) to re-ignite inflation.

3-24 (Early Afternoon, a Few Minutes Later):  Stock rally cheery and scary.

3-24 (Early Afternoon):  I had planned this morning to try to juxtapose Paul Krugman's interpretations concerning what's going on in the economy with the opposing perspectives of some other financial experts, and with the stock market's currently bullish performance... which I'm about to do. I had also decided last night, given the four greater-than-9-to-1 up days and a greater-than-20% boost in the popular market indices in the last ten days of trading, that it was time for me to (cautiously) capitulate as a bear. I wrote last night's market recap with a recommendation to cautiously begin re-investing in equities... until I read Mark Hulbert's article, Hulbert explores head-fake angle. Then I hastily rewrote my market review to reflect the fact that this may still be a bear market rally after all even though it's risen above the equivalent level in the 1929-1932 time frame, as shown below:
    This brings to mind what I wrote week before last on Thursday, March 12th when this rally was in its third day:
"Since 'everyone knows' that this rally isn't a true market turning point but is only a bear market rally, the upturn will probably have longer legs than most professionals anticipate. It will probably continue until the bears capitulate, and a number of pundits are calling it the new bull market. Then it will do the maximum possible amount of damage by turning around and falling further than ever, thus capturing part of the remaining $$$ of investors who have decided that they'd better get invested before it's too late. To put it another way, the day that you and I decide that this rally really is the beginning of a new bull market, and we reinvest sizable chunks of our cash in stocks to avoid being left behind--that, in retrospect, will be the day when this market rally tops, and begins bobbing a little lower and a little lower until one fine day, it begins a free-fall to new lows.
    "T'was ever thus."

    How appropriate! Last night, I--even I, who wrote the above paragraph 12 days ago--capitulated. I was ready to re-invest sizable chunks of my cash in stocks to avoid being left behind. And a number of pundits are calling it the new bull market. Of course, this doesn't mean that it isn't the new bull market, or if it's a bear market rally, that it will turn around now, but Mark Hulbert's article at least raises questions about it.

Economic Report: Home prices rise for the first time in a year, FHFA says

    This morning, 24/7 Wall Street's Douglas McIntyre points, The Housing Mirage: Misleading Numbers, out that some of the news that's being interpreted as good news by bulls is not: He begins by saying, "
The existing home sales data which was released to the market earlier was a 'half empty, half full' set of data. The market seemed to take it as just full and left the empty part behind." Later, he observes, "When unemployment, consumer confidence, GDP, manufacturing, and capital expenditures are all falling simultaneously, it is hard to find optimists, but they will grab even the slightest bit of ambiguous information and claim that the recovery is underway." He concludes, "From the middle of last year until a month or so ago, the interpretation of almost all economic information was negative because the data was unidirectional. That is changing. There are sign posts which point in two directions. It is likely that neither road sign is entirely right. In many cases both are wrong and making predictions about how the recession is going actually becomes more difficult and not less."
    John Ogg explains why improving housing data may not be all that it seems: Existing Housing Data Could Bring New Waves of Selling.
    This article, The Economy Now: Waiting For Godot, also written by John McIntyre, mentions opposing opinions on the Treasury's new plan, with Paul Krugman and John Galbraith on one side, , and PIMCO's Bill Gross on the other. “'
This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically,' Bill Gross, PIMCO’s co-chief investment officer, told Reuters. The market moved up 7% mostly on the strength of the Treasury releasing the new program that some analysts believe could improve bank balance sheets." In other words, this Treasury program should help the banks by removing the toxic loans from their balance sheets, shifting the risks and losses to the taxpayer (with the possibility of gains for the taxpayer if these toxic assets aren't as toxic as they seem).
    Mr. McIntyre continues,:
    " The market run-up is working on the same dynamics as a hydrofoil. A small bit of news which may be good is lifting the larger market well above the  chop.

The market knows next to nothing about the fundamentals that should drive money into equities at this point. The skepticism about the Treasury’s plan is enough so that it would be fair to guess that it has less than a 50/50 chance of succeeding. The toxic assets that may be bought from financial company balance sheets are only a part of the problem that banks face. Consumer, commercial real estate, and business loan defaults are almost certain to undermine money center results for the rest of this year."
The market is also rallying ahead of two pieces of bad news. One is the unemployment number for March and the other is the GDP figure for the first quarter."
   He concludes, 
Unemployment lags by a quarter or two, but the jobs picture should begin to improve by the end of the year. But, that is a classic recession and the economy as it is moving now, may not follow a pattern that looks anything like what it has done in the past. It may not even share many traits with The Great Depression. This downturn is likely to be sui generis.
One of the remarkable things about “Waiting for Godot” is that the main characters know very little about the man that they say they are waiting for. He never shows up.  We actually know almost nothing about this recession, since it doesn’t seem to resemble anything that the American economy has experienced before."

    The Geithner plan appears likely to benefit banks, boosting their stock yesterday by double-digit levels. From the standpoint of the economy over the long-term, the situation is less benign, as chronicled by Drs. Krugman and  Galbraith:. To quote Dr. Galbraith, Krugman & Galbraith: Be Afraid. Be Very Afraid. - The Plank,
For my part, when I compare this situation to 1929, I'm not making a rhetorical point, or exaggerating for flair. It's what I think. It's what the specialists I talk to think.  And have thought, since at least early last summer, long before the crisis took over the campaign. What is happening here, is the application of routine post-war econometric modeling and budget procedures to the present situation. If we are in a crisis, and out-of-the-postwar range, then the routine methods are going to be radically wrong.  Not just off by 0.3 percent. Off by a great deal, and for much longer."
    So are we out-of-the-postwar range? The answer to that is an immediate "yes. We're in the first postwar "recession" in which the Fed's standard tool for rekindling the economy, lowering interest rates, has failed to work. 
    In the end, what concerns us is:
(1) Will this contraction get bad enough that we'll want our cash for living expenses?
(2) How long will we have to wait before the economy recovers?
(3) How much farther down will the markets go?
    Normally, I would be bottom-fishing and dollar-cost averaging by now. I've never worried before about whether the U. S. economy would make it out of a recession. During the deep 1982 recession and accompanying bear market, I was waiting for the bottom so that I could jump in with both feet. In retrospect, as dumb, blind luck would have it, on the very hour (and nearly the very minute) of the very day that the 1982 bear market hit bottom (which was also the bottom of the 1966-to-1982 super-bear market), I jumped into the market with everything I could "buy, beg, borrow, or steal". (The Federal Funds Rate stood at 16% in August, 1982.) But circumstances are very different this time around. This isn't a recession in my book. Rather, it's a deflationary recession, or in other words, a depression.
    It may be worth risking a little money to dip a toe in the water, but the more I review the current market rally, the less I like it. 
    For one thing, it didn't start with a capitulation of the bulls. As the charts below, reveal, unlike the bottom on November 20-21, 2008, there was no panicky sell-off on March 9th and no spike in the VIX. (The VIX hit a 51 that day, which was its
lowest (least-worried) value in a week.)
    For another, although the VIX has remained stubbornly above 40 throughout this rally, there's no shortage of sages assuring us that the economy has turned the corner, and that an explosive recovery of real estate and of the stock market has begun.
    Third, I took the rapid rise of the post-March 9 stock market as an bona fide that this might be a new bull market, whereas Mark Hulbert's article (above) suggests that it's characteristic of a bear market rally.
    Here are a few investments (below) other than the ones I listed last night.
    Ten Stocks That Should Double
Cramer Touts Dividend Growers (APD, NAT, MMM, GE)
    In Another Important Vote Against The Geithner Plan, Douglas McIntyre adds the name of Nobel-Prize winning economist Joseph Stigletz to those of Paul Krugman and John Galbraith.